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Am I Still a US citizen? Clearing the Confusion Regarding Loss of US citizenship for Tax Purposes (Updated)
Unlike nearly every other country in the world, the United States taxes its citizens on their worldwide income, regardless of where that income is earned, or where they live. These intricate and confusing requirements often result in substantial and burdensome tax compliance costs for US citizens living abroad. They also create ongoing risks of harsh penalties due to non-compliance, and can result in US tax owing on top of everything else.
What can a US citizen living abroad do to bring this to a halt? They are faced with three options:
1. Ignore US filing obligations (highly not recommended);
2. Continue with annual tax and compliance obligations (great for your US accountant and the IRS, but normally not for your wallet); or
3. Prevent future US tax filings by terminating one’s US citizenship properly.
1. Ignore US tax filing obligations
While the first option of simply ignoring US filing obligations appears the simplest, it is fraught with potential dangers, particularly with the enactment of the Foreign Account Tax Compliance Act (“FATCA”). Under FATCA, foreign financial institutions are obligated to relay information concerning accounts held by United States persons (including citizens) to the IRS either directly or through their respective governments. FATCA heightened the IRS’ awareness of accounts held outside the United States by US persons. It also simplifies ferreting out non-compliance and enhances the IRS’ ability to impose penalties. Now, more than ever, the IRS is cracking down on non-compliance by US persons living abroad, and the risks associated with ignoring filing obligations will mount quickly. In other words, ignorance may be bliss, but the risk of detection and being stung with tens of thousands in penalties for not filing is high.
2. Continue with US tax filing obligations
Attempting to become fully compliant also has its pitfalls. The complex maze of filing requirements created by the US tax system can trip up even the most experienced tax professional. This is particularly true for US citizens living abroad as most foreign tax professionals develop their expertise based on that jurisdiction’s tax laws, not the laws of the United States. As a result, taxpayers may find themselves in the unenviable position of not only paying high fees for compliance services, but also facing stiff penalties imposed by the IRS due to their preparer’s failure to file the necessary forms.
Take a typical US citizen living in (e.g.) Canada with a simple portfolio of assets including a Canadian Registered Retirement Savings Plan (“RRSP”), a Canadian Tax-Free Savings Account (”TFSA”), savings in a bank account of $75,000, and annual income of $60,000. Such an individual must file the following IRS forms at a minimum: 1040, 3520, 3520-A, 8621 and FBAR. The IRS estimates that completion of these forms will take approximately sixty hours, not including any schedules required to be attached to Form 1040 (e.g. Schedule A for itemized deductions) and the FBAR. Without specialized knowledge and training, many tax professionals neglect to file all these forms and others that may arise. Correcting these errors can result in doubling up on compliance costs, not to mention failure-to-file penalties ranging in the tens of thousands of dollars. Not to mention that you may owe US tax to boot!
3. Terminate US citizenship
Terminating US citizenship is a difficult and important decision. Individuals exploring this potential route should seek professional advice, and weigh all relevant factors before moving forward. US citizens are afforded many privileges and have access to benefits that non-citizens do not enjoy, including protection abroad, consular services, the right to vote, and easy access to the US job market. Once an individual properly loses their United States citizenship, their US reporting and filing obligations, by virtue of being a citizen, terminate after filing a final year return. In addition, non-resident, non-citizen renounced individuals are not subject to the US estate tax at death except as to “US situs property” (generally property situated within the US).
So how does an individual terminate US citizenship? In the past, US immigration law and tax law were on the same page: once you stopped being a US citizen under immigration law, your tax filing obligations stopped as well. However, under current law, tax filing obligations continue until certain factors have been met regardless of the date the individual stopped being a US citizen for immigration purposes.
Many US citizens were told years ago that they lost their US citizenship by becoming a citizen of another country or working for another government. Fast forward 30 years, and those rules were undone for immigration and have no applicability for tax purposes. In short, immigration law is NOT tax law and you are still a US citizen!
The intersection between immigration law and tax law can also have potentially disastrous results. An individual who thought they lost their US citizenship years ago (e.g. by taking an oath to a foreign country with the intent to relinquish US citizenship) almost certainly still has continuing US tax filing obligations (and thus may be subject to massive penalties for non-filing returns if they don’t get complaint under an amnesty program) because they have not yet renounced their citizenship for tax purposes (IRC § 877A(g)(4)).
In short, don’t listen to immigration lawyers on properly renouncing your US citizenship for tax purposes!
Offshore activity by US citizens and residents continues to garner increased attention from lawmakers in the United States. As a result, the laws and restrictions imposed upon relinquishing one’s citizenship, and reporting and filing obligations of those living abroad continue to increase in complexity and burden. These problematic issues will likely only continue to grow, and the IRS has greatly bolstered its ability to identify non-compliant citizens living abroad. Learning more about US citizenship renunciation can help you and your family make the right decision for your future.
Moodys Tax Law runs the largest renunciation group in the world and has helped thousands of US expats renounce properly. But it MUST be done the right way. The US has many pitfalls and landmines (exit tax, inheritance tax, disbarment from the US for life, loss of benefits, etc.) that one must successfully navigate to renounce the right way.
Our team of US lawyers represents between 600 and 900 US citizens renouncing their US citizenship every year on six continents – more than any other firm in the world. Our webinars are completely free, and we’ll walk you through everything you need to know to ensure you renounce your US citizenship the right way to avoid any obstacles.
If you would like more information on renouncing your US citizenship, we urge you to attend one of our webinars on the topic. There live are sessions tailored to US expats living in all corners of the world – Canada, the Caribbean, Australia, New Zeeland, Asia, the UK, Europe, South and Central America, the Middle East, and more. Recordings of the sessions can be made available as well if one of the upcoming live webinars does not fit your schedule.
We know that you will have many questions about how these changes will affect you and your family. Our attendees are invited to submit questions ahead of time that we strive to answer during our session. Sign up today via the below link.
If you would like to get the process started on addressing your US issues immediately (with legal fees in mind) please schedule a one-hour call or video conference consultation with me by: